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5 Reasons to Support Leggett's (LEG) Solid Prospects for 2021

Leggett & Platt's (LEG) strategic long-term growth plan and inorganic drive are set to boost its performance for the rest of 2021.

This story originally appeared on Zacks

Leggett & Platt, Incorporated’s LEG furniture business has been rallying of late. This global manufacturer that conceives, designs, and produces a wide variety of engineered components as well as products has been reaping benefits from its strategies to enhance the business portfolio, disciplined capital allocation, and strong demand in residential end markets.

In the past six months, the stock has gained 4.4% against the Zacks Furniture industry’s 4.2% fall. Industry peers like Bassett Furniture Industries, Incorporated BSET, La-Z-Boy Incorporated LZB, and Sleep Number Corporation SNBR have declined 19.5%, 19%, and 26.5%, respectively, in the same period.

Encouragingly, earnings estimates for 2021 indicate 33.7% year-over-year growth. The same for 2022 suggests a rise of 9.3% from 2021. In addition to the above-mentioned tailwinds, the uptrend is backed by a solid earnings surprise history. Leggett’s earnings surpassed the Zacks Consensus Estimate in the trailing nine quarters. This positive trend signifies bullish analyst sentiments and justifies the company’s Zacks Rank #2 (Buy), indicating robust fundamentals and the expectation of outperformance in the near term.

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You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Major Growth Drivers

Implementation of Long-Term Plans Bodes Well: Leggett’s long-term growth plan that was announced in November 2007 has been solidifying the business. The company has successfully completed the first two parts of the strategic plan that includes the divestiture of low-performing businesses, and improvement in margins and returns. Leggett is presently working on the third part of the plan that projects 6-9% top-line growth annually. The company’s long-term revenue target assumes 6% organic growth and solid contribution from acquisitions.

Leggett has significant operating leverage to accomplish the third part of its plan. The company has a considerable amount of retained spare production to meet product demand valuing $4 billion. As a result of the gradual phase-out of the pandemic, it will certainly gain momentum in the market that was slowed down by COVID-related disruptions. Further, it is focused on attaining the long-term EBIT margin target of 11.5-12.5%. It has plans to maintain these cost efficiencies in 2021.

Inorganic Drive Boosts Growth: Leggett depends largely on acquisitions as part of its growth strategy to supplement organic growth and expand across boundaries. During the second quarter, Leggett acquired two businesses. On Jun 4, it acquired Kayfoam — a leading provider of specialty foam and finished mattresses, primarily serving customers in the U.K. as well as Ireland. Again in May, Leggett acquired a Poland-based small manufacturer of bent metal tubing used in office and residential furniture. The company has been an important supplier to Leggett’s local Work Furniture operation. At January-end, the company acquired a U.K. manufacturer specializing in metallic ducting systems, flexible joints, and components for space, military as well as commercial applications.

It intends to continue making investments to support the expansion of the existing businesses and product lines, wherein sales are growing profitably.

Housing Looks Good: The U.S. housing industry has been booming despite headwinds like low inventory levels, inflationary pressure, and broad-based economic as well as public health risks associated with the new variants of the pandemic. Solid housing demand has been a boon to the furniture industry as a whole. Greater-than-expected demand for home improvement products has also been benefiting the company.

Per the recent housing data released by the U.S. Census Bureau and U.S. Department of Housing and Urban Development jointly, privately-owned housing starts climbed 3.9% in August from the previous month. Building permits for the said month rose 6% from July. (Read more: August Starts, Permits Rise: 7 Construction Stocks to Bet on)

Rewarding Shareholders: Leggett has been actively managing cash flows via returning considerable free cash to investors through share repurchases and dividends. On May 3, 2021, the company announced that it has raised the second-quarter dividend to 42 cents per share, reflecting a 5% increase from first-quarter 2020. This marks its 50th consecutive year of annual dividend increase and places the company among 31 other companies, known as "Dividend Kings,” with at least 50 years of consecutive annual dividend growth.

Leggett has been impressively managing payouts with solid cost management. As of Jun 30, 2021, the company had $1.3 billion in total liquidity, including cash and equivalents of $231.6 million.

Superior ROE: Leggett’s return on equity (ROE) is indicative of growth potential. The company’s ROE of 27.5% compares favorably with the industry average of 14.2%, implying that it is efficient in using shareholders’ funds.

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Leggett & Platt, Incorporated (LEG): Free Stock Analysis Report


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